European officials have struck a deal that could radically change the bonus culture in Europe's banking industry.

The European Union has agreed to a new financial reform that includes a cap on bonuses for bankers, in a deal that is expected to be introduced next year.

"We need to start with the fundamental question of: 'What do we want the banks to do for the economy and do we have the right incentive structures in place?' and I personally believe the huge excessive bonuses have not produced the right incentive structures to grow the economy."

- Birgitte Andersen, Big Innovation Centre.

But is going after the so-called 'fat cats' of the financial world the right move in troubled times?

The aim behind the move is to calm public anger at the financial sector. It was of course money from taxpayers that rescued banks that were deemed "too big too fail" following the 2008 crash.

Under the agreement, bankers' bonuses will be automatically limited to a year's salary, making it one of the world's strictest pay curbs.

That ceiling, though, could be lifted to a maximum of twice an employee's annual salary if the move gets the approval from a majority of a bank's shareholders.

The deal is part of a wider overhaul of European financial legislation designed to make banks less liable to collapse in the aftermath of the 2008 financial crisis.

"This is a case where two wrongs don't make a right. I think the governments were wrong to bail out these banks in the first place; they should have let banks fail. But just because they made that mistake does not mean they should set a bad precedent and try to set private sector compensation levels ..."

-Peter Schiff, CEO of Euro Pacific Capital

Now politicians in the UK say it will hurt the City of London, the financial centre of Europe, and their ability to retain top talent. But critics say other forms of so-called compensation - like rising salries, deferred payments and stock payouts - are increasing.

One of the loudest criticisms of big bonuses is that it encourages bankers to take excessive risks with other people's money. And even after the global financial crash of 2008, banks continue to pour billions of dollars into bonuses.

In the UK, Barclays Bank has said it has a bonus pool of around $2.7bn

Partially state-owned Royal Bank of Scotland has a pool of just over $1bn

In the US, officials estimated that Wall Street bankers got $20bn in bonuses last year - that is an 8 percent from the year before - though still less than the $34.3bn paid out five years ago

The breakthrough bonus deal is a small but controversial part of a new piece of legislation, designed to force European banks to adhere to what is called Basel III. It is the latest drive by the Basel Committee on Banking supervision to improve Banking regulation.

Basel III requires Banks to build up capital reserves so that they are able to absorb losses in a crisis.

The changes were supposed to be implemented from January this year but most countries including the US, failed to meet the deadline.

We ask what are the risks of this latest measure? What does it mean for the banking industry in Europe? And could it really prevent another financial crisis?

Inside Story, with presenter Hazem Sika, discusses with guests: Alessio Rastani, a trader and founder of leadingtrader.com; Birgitte Andersen, director of the Big Innovation Centre, and an economist specialising in innovation and EU policy; and Peter Schiff, CEO of Euro Pacific Capital, an American investment broker and author of several books on the financial crisis.

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